ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad IN INCOME TAX APPELLATE TRIBUNAL Hyderabad B Bench, Hyderabad Before Smt. P. Madhavi Devi, Judicial Member AND Shri .B. Ramakotaiah, Accountant Member ITA Nos.359 & 361/Hyd/2013 (Assessment Years:2008-09 & 2009-10) Dy. Commissioner of Vs M/s. Neuland Laboratories Ltd Income Tax, Circle 16(1) Hyderabad Hyderabad PAN: AAACN 9531 E ITA Nos.420 & 421/Hyd/2013 (Assessment Years:2008-09 & 2009-10) M/s. Neuland Vs Dy. Commissioner of Income Laboratories Ltd Tax, Circle 16(1) Hyderabad Hyderabad PAN: AAACN 9531 E For Assessee: Shri M.V. Anil Kumar For Revenue: Shri P. Soma Sekhar Reddy, DR Date of Hearing: 15.09.2016 Date of Pronouncement: 05 .10.2016 ORDER Per Smt. P. Madhavi Devi, J.M. above appeals are cross appeals by both assessee as well as Revenue for A.Ys 2008-09 and 2009- 10 respectively. As common issues are arising in both years, appeals were heard together and are disposed of by this common and consolidated order. Page 1 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad 2. Brief facts of case for A.Y 2008-09 are that assessee company, engaged in business of manufacturing and trading of bulk drugs and intermediates, filed its return of income relevant to A.Y declaring Nil income. During assessment proceedings 143(3) of I.T. Act, AO observed that assessee has not deducted tax at source on sales commissions total of which comes to Rs.11,77,368. Therefore, he disallowed said sum u/s 40(a)(ia) of I.T. Act and added it to total income of assessee. Thereafter, he proceeded to consider assessee s payment to M/s. A.M. Pappas & Associates LLC and observed that consultancy charges of Rs.1,57,45,921 have been paid to said company in respect of agreement termed as Master Services Agreement dated 1.11.2003. As per terms of agreement with AM Pappas & Associates, following services were to be rendered: i) in its conversion to drug discovery and development technology company by implementing comprehensive, long term strategic plan covering 10 to 12 year period. ii) to dispatch doctor Jeffrey Collins Vice President A.M.P. & s Transaction Advisory Group and if possible one additional project team member to company s location in Hyderabad. iii) Make recommendation concerning specific co- development partnerships with external pharmaceutical companies to obtain access to specific early-stage compounds identity. iv) Assist in planning and designing of companies R&D facility which may include serving as liaison with appropriate architectural firm./ Page 2 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad 3. AO observed that out of above, only few of functions/services are to be rendered in connection with management services agreement and that many of functions are required to be carried out in India by said Consultant. Therefore, he was of opinion that services to be rendered are in nature of technology services to be rendered in India and clearly fall within scope of provisions of section 9(1)(vi) and 9(1)(vii) of I.T. Act, 1961 and therefore, assessee is liable to deduct tax at source u/s 195(2) of I.T. Act. For coming to this conclusion, he placed reliance upon following decisions: a) Mangalore Refinery & Petrochemicals Ltd vs. DCIT (2008) 113 ITD 85 (Mum.Trib) b) Re Rajiv Malhotra (2006)284 ITR 564 (AAR) c) South West Mining Ltd (2005) 278 ITR 233 (AAR) d) Leonhardt Andra Und Partner GmbH vs. CIT (249 ITR 418) e) Steffen, Robertson & Kristen Consulting Engineers & Scientists vs. CIT (230 ITR 206). 4. He further observed from terms of agreement that consultancy is for rendering these services in India as there is clear cut clause which says that certain personnel will be sent to India for conducting relevant studies and rendering advisory services. He also observed that place of activity is in India, as main intention was setting up of advanced R&D facility and conducting of advanced research activity and providing guidance for industry s best practices for marketing Page 3 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad company s products and also to assist assessee company in acquiring manufacturing rights within agreed time frame. Therefore, according to AO, situs of agreement is in India and assessee is liable for deduction of tax at source u/s 195 of Act which was not done. Therefore, he invoked provisions of section 40(a)(i) and denied claim of deduction of Rs.1,57,45,921 and brought entire sum to tax for both A.Ys. 5. Thereafter, AO also observed that assessee claimed deduction of sum of Rs.37,78,11,222 u/s 35(2AB) of I.T. Act for A.Y 2008-09. He observed that assessee has set up new R&D facility during year for which deduction was claimed at two places i.e. Units at Bonthapally and Pashamylaram Villages. Therefore, assessee was asked to furnish copies of 3CM and 3 CL forms and details of expenditure with respect to claim of deduction u/s 35(2AB) of Act. He also observed that expenditure consists of mainly construction of building and setting up of R&D facilities for which various equipments have been purchased. From details furnished, AO also observed that steroid project and R&D pilot plant are being constructed under head R&D Civil CWIP and additions have been made to R&D building and Plant & Machinery at Bonthapally village, apart from additions of R&D building and Plant & Machinery at Pashamylaram Village. He observed that revenue expenditure, consists of R&D expenses, materials and consumables, power & fuel, professional charges paid and other misc. expenses and expenditure at Bonthapally Unit @ 100% is Rs.6,37,77,345, whereas Page 4 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad expenditure @ 100% at Pashamylaram Village where pilot plant is being set up is Rs.13,62,79,117. 6. On perusal of bills and vouchers produced during assessment proceedings, AO observed that assessee has furnished copy of Form 3CM dated 31.10.2007 in which it is stated that R&D facility is approved for purpose of section 35(2AB) from 1.4.2005 to 31.3.2009 and that it is pertaining to only Bonthapally Village Unit. He further observed that Form No.3CM from prescribed authority for other Unit at Pashamylaram Village has not been produced so as to examine fulfillment of conditions contained in section 35(2AB) of Act. He observed that as per language used in section 35(2AB), not only in House Research & Development facility but also expenditure shall be approved by prescribed authority for purpose of section 35(2AB). Since assessee has not furnished evidence that expenditure has also been approved by authority, he disallowed entire expenditure including weighted deduction claimed by assessee i.e. Rs.5,96,87,946 on which weighted deduction @ 150% worked out to Rs.8,95,31,769. Thereafter, he proceeded to consider whether assessee has fulfilled conditions laid down in section 35(2AB) of Act. As regards approval of prescribed authority in respect of qualifying expenditure to be certified in Form No.3CL is concerned, he observed that Form 3CM produced by assessee only relates to Bonthapally Village and therefore, he allowed claim @ 100% of expenditure relating to Bonthapally village only which worked out to Rs.6,37,77,345. As regards assessee s claim of deduction u/s Page 5 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad 35(2AB) relating to Pashamylaram village, he disallowed same i.e. sum of Rs.31,41,33,877 and brought it to tax. 7. Aggrieved, assessee preferred appeal before CIT (A) who partly allowed same. Against relief granted by CIT (A), Revenue is in appeal before us, while assessee is in appeal against denial of claim by CIT (A). CIT (A) after considering assessee s contentions has confirmed disallowance of sales commission u/s 40(a)(ia) of Act for making payment without TDS. As regards disallowance u/s 40(a)(ia) of consultancy charges to M/s AM Pappas & Associates LLC without making TDS also, he confirmed order of AO. However, as regards assessee s claim of deduction u/s 35(2AB) of Act is concerned, he has taken into consideration certificates produced by assessee i.e. Form 3CM and 3CL certificates and has allowed claim of assessee. Against disallowances confirmed u/s 40(a)(ia), assessee is in appeal before us, while against granting of relief u/s 35(2AB) of Act, Revenue is in appeal before us. 8. It is case of Revenue that CIT (A) has ignored findings of AO that Form No.3CM mentions only one Unit, whereas CIT (A) has granted relief with regard to both Units. learned DR supported orders of AO while learned Counsel for assessee supported orders of CIT (A) and has also drawn our attention to written submissions filed before CIT (A) and also documents i.e. Forms 3CM and 3CL filed before CIT (A). As seen from these two certificates, we find that certificates have been obtained subsequently i.e. dated 31.10.2012 wherein both units are Page 6 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad mentioned in certificate and also expenditure on land and building as well as revenue expenditure has also approved by prescribed authority. We find that CIT (A) has accepted certificates without any verification of same. In view of same, we deem it fit and proper to remit issue to file of AO only to verify veracity of these forms and to allow deduction u/s 35(2AB) of Act accordingly. Thus, Revenue s grounds of appeal against allowing of deduction u/s 35(2AB) in respect of both Units and also revenue expenditure are remitted to file of AO and Revenue s appeals for both years are treated as allowed for statistical purposes. 9. As regards assessee s appeals are concerned, we find that they are against disallowance u/s 40(a)(ia) of Act of following two items for A.Y 2008-09: i) Sales commission of Rs.11,77,368 ii) Consultancy charges paid to M/s AM Pappas & Associates LLC for sum of Rs.1,57,45,951. 10. As far as sales commission is concerned, assessee had submitted before CIT (A) that amount is sum paid to Directors and is not sales commission but his salary and as salary includes commission as per section 17, provisions of section 40(a)(ia) are not applicable. We find that except making claim, assessee has not furnished any further information/evidence before CIT (A) and also before us. In view of same, we do not find any reason to interfere with order of CIT (A). Thus, assessee s ground of appeal No.1 is rejected. Page 7 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad 11. As regards 2nd item disallowed u/s 40(a)(ia), undisputed facts are that assessee had entered into agreement with M/s. AM Pappas & Associates LLC for rendering of certain services to assessee vide Master Agreement dated 1.11.2003. AO has held it to be fees for technical services and CIT (A) has confirmed same. Before us, learned Counsel for assessee submitted that assessee had made detailed submissions before CIT (A) submitting that all services under agreement are rendered outside India and also payments were made outside India and therefore, provisions of section 195 of Act are not applicable to such payments. He further submitted that assessee had clearly submitted that said company is in business of development of companies products and venture and charges paid to said company is its business income and since recipient company is not have PE in India, business income is not taxable in India under Article VII of DTAA between India and USA. Thus, according to him, said payment is not covered by provisions of section 195 of Act and disallowance u/s 40(a)(ia) is not called for. learned Counsel has filed copies of written submission filed before CIT (A). On going through said submissions, we find that assessee has made detailed submissions as to why payment is not taxable in India and also as to why TDS provisions are not applicable to said payment and we also find that CIT (A), though, has reproduced assessee s contentions in brief at Para 6.2 of his order has not given any reason as to why he is not accepting assessee s contentions. When assessee makes submissions on nature of services and also as to whether services have Page 8 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad been rendered in India, we are of opinion that it is duty of authority to consider and verify veracity of same, before coming to any conclusion as to taxability of same in India. Before bringing to tax any income, nature of income has to be determined and only on basis of such conclusion can income be brought to tax in India. If payment of consultancy charges are in nature of fees for technical services or royalty , then it would be taxable in India irrespective of situs of services. But if it is business income of recipient, then even if it is earned in India, it would be taxable only if recipient has PE in India. It is also to be seen that where provisions of DTAA are applicable to assessee, then i.e. Income Tax Provisions or DTAA whichever are beneficial to assessee are to be made applicable. We find that none of authorities below have gone into exact nature of services and also as to whether services has been rendered inside or outside India. Without determining nature of services, we are of opinion that same cannot be brought to tax in India and TDS provisions u/s 195 of Act can be made applicable. In view of same, we deem it fit and proper to set aside findings of AO and to remand issue to AO for de novo consideration in accordance with law and reconsideration as above. 12. In result, assessee s appeal is partly allowed and Revenue s appeal is allowed for statistical purposes. 13. For A.Y 2009-10, assessee is in appeal against confirmation of disallowance made by AO of Rs.1,48,48,290 u/s 40(a)(ia) of Act for non deduction of tax at Page 9 of 10 ITA Nos 359 420 361 and 421 of 2013 New Land Lab Ltd Hyderabad source from payments made to M/s AM Pappas & Associates LLC. We have already adjudicated this ground of appeal for A.Y 2008-09 and for reasons given therein, this appeal is also set aside to file of AO for de novo consideration in accordance with above direction. 14. In Revenue s appeal, we find that only ground is against allowing of deduction u/s 35(2AB) of Act and for detailed reasons given in Revenue s appeal for A.Y 2008-09, Revenue s appeal is set aside to file of AO for verification of certificates/Forms 3CM and 3CL filed by assessee and to allow deduction u/s 35(2AB) of Act in accordance with law. 15. In result, both assessee s and Revenue s appeals are allowed for statistical purposes. Order pronounced in Open Court on 5th October, 2016. Sd/- Sd/- (B. Ramakotaiah) (P. Madhavi Devi) Accountant Member Judicial Member Hyderabad, dated 5th October, 2016. Vinodan/sps Copy to: 1 Dy. Commissioner of Income Tax, Circle 16(1), Room No.612, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad 2 M/s. Neuland Laboratories Ltd, 6-3-853/1, Flat No.204, Meridian Plaza, Ameerpet, Hyderabad 3 CIT (A)-V Hyderabad 4 CIT IV Hyderabad 5 DR, ITAT Hyderabad 6 Guard File By Order Page 10 of 10 Dy. Commissioner of Income Tax, Circle 16(1) Hyderabad v. M/s. Neuland Laboratories Ltd